Make/buy analysis

What the tool is for

A make/buy decision asks whether a part, assembly or service should be produced internally or bought from a supplier. It looks like a cost question, but the decisions that go wrong usually go wrong on something else: capability that was assumed, capacity that was not there, or know-how that left with the work. The tool puts the cost comparison next to capability, capacity and strategy so they are weighed together.

The cost model

Each cost element is entered once, as per unit, per year or one-time, under make, buy or both:

• Per unit: material, labor and machine time, variable overhead, the purchase price, freight and duty, quality cost (inspection, scrap, returns) and a risk premium.
• Per year: fixed costs that exist only because of the option, such as a new cell's supervision and maintenance, or the audits and engineering time spent managing a supplier.
• One-time: equipment, tooling and qualification. These are spread evenly over the horizon you choose.

The annual cost of each option at volume V is fixed cost plus cost per unit × V. Making usually has the higher fixed cost and the lower cost per unit, so the two lines cross at the break-even volume: (fixed cost to make − fixed cost to buy) ÷ (unit cost to buy − unit cost to make). Above it, the option with the lower unit cost wins. If the planned volume sits close to break-even, a forecast error can reverse the answer, and the tool says so.

Only relevant costs belong in the comparison: those that change with the decision. Plant overhead that is allocated to the part but stays whether you make it or not, and money already spent, are marked not relevant and left out. Including them is the classic make/buy error.

The risk premium is the expected cost of a disruption: the chance of it in a year times what it would cost. A single source on another continent carries a larger one than an internal cell. For time value of money, take the cash flows to the NPV and IRR tool.

Capability, capacity and strategy

The CSQP Body of Knowledge asks for internal and external capability analysis using historical performance. Compare Cpk on the key characteristic, defect history in ppm on similar parts, lead time, and the capacity each side can commit. Then score the strategic factors that cost leaves out:

• Core competence: is this work part of what makes you competitive? Outsourcing a core skill can hollow it out.
• Intellectual property: a supplier who makes the part learns the process, and may sell it to a competitor.
• Control: how much direct control over quality and schedule does the product need?

The weighted scoring works like the supplier selection matrix. When cost points one way and the scoring the other, the tool flags it, so the rationale has to explain the trade-off.

The SWOT summary

The SWOT looks at the in-house option: strengths and weaknesses of your own operation, and opportunities and threats outside it, such as demand, the supply market and technology. For a full SWOT and PESTLE of a business, use the SWOT and PESTLE tool.

Split volume is a common answer: make the base load and buy the rest, which also gives a qualified second source. If you buy, place the item in the Kraljic portfolio to choose how to manage the supplier.

On the exam

Make/buy decisions are CSQP I.C.3: provide input using internal and external capability analysis, SWOT and historical performance. They sit under supply chain cost analysis (I.C), next to cost reduction (I.C.1). Expect to compute a break-even volume, pick out the relevant costs, and judge when a strategic factor should outweigh a cost advantage.

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